How much do you need to know before you invest?

The year 2020 was filled with nothing but dismay. However, one Cinderella storyline that broke through was the narrative of new investors entering the stock market in April of last year, when the majority of companies were beaten down, to come out with a huge sum of winnings. 

This development inflated a new interest in the stock market with new and young investors. However, not all these investors understood what they were doing, especially if the investor was inexperienced in the tricks and trades of the stock market. The majority of young investors were receiving investing advice on YouTube or Reddit, a practice highly discouraged by former Morgan Stanley financial advisor and Assistant Professor of Finance Frederick Dewald III.

1.Identify Your Position

Dewald highly recommends that people truly analyze their own needs and wants when they begin to think about investing inside the market. “There is no one size fits all,” said Dewald. As he explains, investors have to know what their end goal is with these investments. For example, are you trying to invest so you can buy a house, or a car, for a quick buck or even retirement? This step is the most important step of all because it will dictate how an investor’s portfolio and strategy will play out. 

2. Understand Your Risk Tolerance

Before you start investing, realize markets don’t always go up. This is an extremely important fact to know because this will definitely test your risk tolerance. 

How will you react if there is a long period of drought in the market? Each time a market skyrockets into space, it always comes back crashing down to Earth; this is called a correction. Of course, this steps back to understanding who you are as an investor. Additionally, it is completely fine if you don’t have much risk tolerance because there are strategies designed for your tolerance. 

3. Decide if You Would Prefer a Safe Investment

The one piece of advice Dewald will happily teach people with low-risk tolerance is to invest in a good index fund. “Is it flashy? No. Is it the next Gamestop? No. But it’s a big advantage especially if you’re younger,” said Dewald. On an annual average, calculated with inflation, a good index fund can increase about 6.7% of an investment, which can add up to a significant amount of money over time, especially for those who start investing when they are young. 

4. Research Individual Stocks

Although he also offers his opinion for the more daring crowds, if you wish to invest in individual stocks you better have the stomach and will for it. Picking stocks is not as easy as Reddit makes it seem. You have to put a lot of time and effort into reading annual reports, analyzing financials such as balance sheets, income statements and free cash flows, learning the fundamentals of the company, understanding the metrics of the company, calculating the financial math of the company with their growth and valuation prospects, and learning to understand what all this data is telling you. All analytics contain individual stories about the company. It is the investor’s job to understand the story as a whole. Once you understand the story, you and you alone have to decide whether you like the company or not. 

Additionally, all Lewis students have access to The Wall Street Journal, making reading articles and learning what analysts have to say about certain companies can help students with their own financial research. But again, don’t just take their word for it; otherwise, you’ll be walking into an investment blind. 

If this entire article taught you nothing, then hopefully you at least remember this important quote, “Price is what you pay, value is what you get.”

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